The uneven impact of the COVID-19 pandemic across the euro area

This section examines the differentiated effects of the COVID-19 pandemic on growth across the euro area. Persistent sharp cross-country divergences complicate the functioning of the economic and monetary union (EMU), and may weaken the socio-economic and political support for EMU. Based on a reduced-form econometric analysis of macro-data and an empirical analysis of turnover patterns and prospects for recovery, the section identifies the economy’s sectoral composition and the strictness of the lockdown measures as important factors driving the divergent impact of the pandemic on economic growth. More specifically, the analysis suggests that countries with a larger share of contact-intensive activities have experienced stronger negative growth, and that a higher level of trade openness generally amplified the negative impact of the lockdown measures. A brief overview of monetary and fiscal conditions suggests that the forceful responses of monetary and fiscal policies have helped to dampen the economic shock generated by the pandemic and the related lockdown measures and in so doing have helped contain the divergence forces triggered by the crisis. The risk exists that cross-country divergence will persist well after the pandemic has subsided and the exceptional policies have ended.